3.3 Early theories
Mercantilism is an economic philosophy based on the belief that a nation's wealth depends on accumulated treasure, especially gold. Consequently, the aim of government policies was to increase wealth by promoting exports and discouraging imports. This was accomplished by government monopolies, the subsidisation of domestic export industries and the allocation of trading rights. Duties or quotas were imposed on imports to limit their volume. Colonies were required to provide raw materials and precious metals to their colonial masters and were often required to buy processed goods from these masters.
The concept of mercantilism has two flaws. The first is the incorrect belief that gold and other precious metals have intrinsic value (this is not totally true: gold is used in dentistry and micro-electronics, but otherwise is a fairly 'useless' commodity). The second flaw is that mercantilism rather ignores the fact that production efficiency can be achieved through specialisation. Mercantilism emphasises the sheer volume of exports and imports, and equates the accumulation of wealth with the acquisition of power. This second flaw is addressed in a later theory - that of comparative advantage (see the discussion below).
Some of the terminology of mercantilism has endured: the term balance of trade is still with us. A favourable balance of trade indicates that a country is exporting more than it is importing; an unfavourable balance of trade indicates the opposite.
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